The government has turned down a proposal of the Reserve Bank of India (RBI) to allow public sector banks to select auditors independently.

Last year, RBI had made the proposal to the finance ministry, which forwarded it to the Ministry of Corporate Affairs (MCA), the nodal body for auditors.

The proposal was in line with the practice followed by private and foreign banks that function in the country.

RBI is not directly involved in selection of auditors for private and foreign banks, which, however, have to take prior approval of the central bank for the selection.

Banking sources close to the development say RBI has made the proposal as it wants to get out of its non-core functions.

As part of this, RBI has got out of handling various government businesses and is in the process of exiting direct management of public debt.

The selection of auditors for the public sector banks was a drain on the manpower since the process was tedious, given the importance of the job, said an official source.

Under the present system, the Institute of Chartered Accountants of India ( ICAI) sends RBI a list of auditors for empanelment as auditors for public sector banks. After this, RBI selects the auditors on the basis of their experience, nature of job and competence.

Sources said even if RBI got just an indirect role. the selection would continue to be handled by the government.

However, the government preferred to let RBI handle the selection and had intimated this to the central bank, they said.

Banking sources said the government had become cautious after the audit fiasco at Satyam and wanted the selection process of auditors to be made more stringent, not only for banks but for all companies, especially the listed ones.

Towards this, the MCA also initiated a peer review of the audited balance sheets of the listed companies through a joint effort of the market regulator, the Securities and Exchange Board of India, and the ICAI.